Today’s REI Classroom Lesson

Today, Clint Coons talks to us about selecting the right type of structure to use for wholesaling deals.

REI Classroom Summary

LLCs, S-Corps, C-Corps, and Land Trusts can be confusing. Listen to Clint Coons, the expert to find out what’s best.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Clint: I run into a lot of people who like to wholesale properties. The problem they often run into is the assignability clause in those agreements. That is, the seller will not allow you to assign the contract. Now, individuals who wholesale property have come up with some alternatives to put these deals together. Mainly, they typically create a limited liability company in order to enter into the agreement. So the individual wholesaler sets up an LLC, enters into a contract to buy a piece of property, then finds an individual who would like to take over that contract, and then he sells them the LLC. So the individual who would like to take the contract then steps into his shoes.

Now, that does work. But the problem with it that I see time and time again is the individual who structures this transaction doesn’t know what they’re doing. I mean, it’s complicated. Let’s face it. You set up an LLC and then you want to sell it to someone. You could have tax issues there by transferring that LLC. Is there a proper step up in basis selection made with the Internal Revenue Service when you transfer over the LLC to another party? Have you followed the proper formalities to transfer that limited liability company to the individual who wants to take over that LLC?

I mean, those are just a few of the issues you run into when you’re wholesaling property and you’re trying to set them up through limited liability companies. But let’s face it. It may never be an issue for you because if nothing goes wrong, then you’re in the clear. But it only takes one issue. That is, one problem, and then the whole thing can blow up on you. So what you want to do is find an alternative strategy. This is something I looked into several years ago because I saw a lot of people putting themselves in harm’s way by using limited liability companies to enter into wholesale transactions.

So what I came up with is the trust. Now, first starting off, I thought, “Maybe you should use a land trust to put these deals together.” But then when I started looking at the land trust and seeing how it might fit a wholesale transaction, I realized that’s not going to work. So what I did is I started from scratch. I actually drafted a Wholesale Trust Agreement, an agreement that’s specifically designed for wholesale deals.

So you put your deal in trust. That is, when you go to enter into a contract for purchase with the seller, what you will do is you’ll create a trust right then and there, on the spot. I often give my clients stacks of these trusts. I tell them just take them out with them on the weekends and whenever they’re going out looking for properties to wholesale, all they have to do is just fill the trust out, right then and there, while they’re talking to the seller, and then take title to the contract in that particular trust.

Now, the nice thing about this, as opposed to an LLC, is that you can set them up anytime you need. You don’t have to file them with any Secretary of State. It’s not going to cost you anything. Then, when you find someone who is willing to take over that contract, all you do is you assign them over the trust. Just like a land trust situation where you can assign the beneficial interest in your trust to a limited liability company for asset protection, with a wholesale trust, you can assign the right to that trust to a third-party.

So the third-party would basically buy the trust from you, step into your shoes. The trust has the right to close on the contract, and there you go. That person is now in charge. They go to closing, they take title in the trust and then transfer it back to their own name. This is a great strategy if you are interested in investing in HUD-owned properties.

Many people, if you haven’t ever invested in HUD before, you’re thinking about getting started by putting some offers in on HUDs, and then you want to assign those over to another party, well, you can run into problems. HUD will not permit the assignment, so then you’re stuck with a double-close. I’ve used this strategy with the wholesale trust very successfully for the last several years for my clients to avoid that clause in those HUD agreements that prevent assignability because we’re not assigning the contract. We’re assigning the trust.

So if you’re a wholesaler and you’re looking for an alternative strategy to a limited liability company, or if you’ve just been running into problems with trying to figure out, “How do I assign these contracts to a third-party so I can avoid a double close?” you should consider utilizing a wholesale trust. My name is Clint Coons and I’ll catch you next time.

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Mr. Coons is a founding partner of Anderson Law Group and current manager of Anderson’s Tacoma office. After graduating from the University of Washington with a business degree, Mr. Coons began his career in construction. Giving up the hammer for a gavel, he graduated from Seattle University School of Law in 1997.